The Volcker Rule has been fought by banks ever since its proposal. If you checked out bank operations and their income statements, you would know why. Since the repeal of Glass-Steagall and the subsequent march of every bank to go public, their use of proprietary trading has increased.
No one can do it like a bank.
They can leverage their balance sheets and drive a lot of profitability through the company. In addition to being able to use leverage, they access the Fed window and public markets for cheap money. The cheaper weighted cost of capital for a bank versus a hedge fund gives the bank an edge no one else in the market has.
In addition, banks are the owners of dark pools, and deliberately try to make certain parts of the market place opaque. Corporate bond trading, muni bond trading, many areas of equity and forex trading are simply small private clubs that banks can take a cut on both the entry and exit via their prop trading desks.
The Volcker Rule sort of addresses that but it’s sloppy. The reason it’s sloppy is because the rule is being written by regulators and attorneys. Traders know the real score and spirit of the rule. The other reason the rule is sloppy is that banks have become so big, and the industry so murky that it’s pretty easy for them to justify any trade as a hedge that’s needed for them to conduct business.
Let’s try to simplify it.
Back in the late 1980's, there was a big conflict between independent traders (locals) and brokers at the Chicago Mercantile Exchange. Locals accused brokers of trading against their own customers, taking relatively little risk. The brokers were making money filling orders, and trading against them. In many cases, quid pro quo arrangements were worked out so order fillers simply traded with each other, lining each other’s pockets almost risk free. Sound familiar?
Not all brokers were guilty. In fact, most brokers weren’t. But upon doing a pit by pit survey it was found that many of the largest brokers were also the largest traders. Locals were steamed. They got together and won a change in the rules which still exist today. Rule 552. I think that CME’s rule 552 can be expounded upon to replace all the wishy washiness of the proposed Volcker rule. The rule has changed slightly throughout the years, and electronic trading makes a lot of it moot.